My Consumer Credit Act Agreement is defective. Can it still be enforced?

As interest rates continue to rise, the impact of recent world events such as Covid, Brexit and the war in Ukraine continue to bite and confirmation last week that the UK has entered a recession, businesses and individuals continue to feel the cost-of-living squeeze. This has had an impact on not only performing obligations under finance agreements, whether they are “regulated” under the Consumer Credit Act 1974 (“CCA”) or “unregulated”, but also the ability of borrowers to obtain further finance to repay and restructure existing borrowing.

The inevitable consequence of all the above is that more businesses and individuals are defaulting under their obligations under finance agreements, whether that is a straightforward “cash loan” or potentially an asset finance agreement such as a hire purchase agreement or a conditional sale agreement.

For lenders, it is only at the point of default when reviewing these documents that you may realise that one of the strict requirements under the CCA for documenting, entering into, performing or enforcing the CCA agreement have not been complied with. This can have serious consequences because it may be that the defective agreement can not be enforced without permission of the court and to enforce without that permission could limit the lender’s ability to recover any monies or assets lent under that agreement, or interest, as well as potentially reputational harm for the lender.

Recently, I am being regularly asked to advise on whether (1) an agreement has been “defective” for the purposes of the CCA and (2) if so, how to obtain the relevant permission from the court so that the agreement can be properly enforced to ensure fairness for the borrower and regulatory compliance for the lender.

The legal framework

Under s.8(1) of the CCA, a “consumer credit agreement” is an “…agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides the debtor with credit of any amount”, and also if it is “a regulated credit agreement for the purposes of Chapter 14A of Part 2 of the Regulated Activities Order” (“RAO”). There may be “exemptions” available under the RAO which may mean an agreement which would otherwise be regulated is due to the exemption “unregulated”, but that is outside the scope of this article and will be covered in a follow up piece.

It is also worth noting that under s.189(1) of the CCA that an “individual” can also be a partnership consisting of two or three persons as long as they are not a “body corporate” (i.e. a limited liability company / partnership). A common misconception is that if lending is to a “business” of a sole trader and / or partnership, that the lending will not be regulated by the CCA, but due to these definitions that is not the case, and the agreement may be regulated (absent any other exemptions).

There are several ways in which a CCA agreement may be “defective” and infringe the CCA, which means that the permission of the court is required for the agreement to be enforced. Common infringements are:

1. There has been inadequate disclosure of information under s.55 of the CCA;
2. The agreement is “improperly executed” under s.65 of the CCA, including that the agreement:
   1. Is not in the correct form or does not contain the correct content (i.e. interest rates, parties, repayment terms);
   2. Is not signed;
   3. Has not been provided in an executed copy to the borrower;
   4. Does not confirm the “cancellation rights” to the borrower; and/or
3. The agreement has not been treated as “regulated” due to the nature of the borrower (i.e. the position above regarding sole traders / partnerships).

“Enforcement Application”

Should a lender find themselves faced with an agreement which has infringed the CCA, then before any “enforcement” is taken by the lender an “enforcement application” (as they are commonly referred to) should be made to the court pursuant to s.127 of the CCA.

I have had several instructions in both (1) drafting the pleadings to seek permission of the court to enforce a defective CCA agreement and (2) appearing in court at the final hearing of those proceedings. Although a claim can be brought alongside a “Part 7” claim seeking recovery of monies/goods due and owing under the defective agreement, typically (and especially if no enforcement has yet taken place such as service of a “default notice” pursuant to s.87(1) of the CCA) the claim is brought as a “Part 8” claim.

The Part 8 claim form will make clear that leave is sought to enforce agreements which infringe the CCA and set out the details of the lender and the borrower(s). The Particulars of Claim will make clear that the proceedings are a Consumer Credit Act claim pursuant to Practice Direction 49C of the Civil Procedure Rules, and will set out:

1. The material parts of the agreement;
2. The reason why the agreement infringes the CCA;
3. Whether any prejudice has been caused by the infringement, and if not explaining why no prejudice has been caused; and
4. Confirmation that the lender is seeking leave to enforce the agreement against the borrower.

When deciding whether to make an enforcement order, the court will have regard to (1) any prejudice caused by the contravention in question and the degree of culpability for it and (2) its powers under s.135 and s.136 of the CCA to impose conditions or suspend the operation of terms under an agreement and / or vary agreements. The court can also, if it appears just to do so, reduce or discharge any sum payable by the borrower or compensate the borrower for any prejudice suffered as a direct contravention in question.

It is therefore important before making an enforcement application that consideration is given as to the seriousness of the infringement under the CCA and what prejudice has been caused to the borrower. A clear explanation must be given as to why no prejudice has been caused if that is the case. For example, there may be limited (if any) prejudice caused by an infringement if a borrower has had the benefit of goods hired under a hire purchase agreement and the defect of a CCA agreement which may not be signed, but the lack of a signature means that the CCA agreement cannot be enforced by the borrower without permission of the court.

Conclusion

Consumer protection is rightfully of great importance to not only a borrower but a lender as well, including for a lender reputationally. However, mistakes do sometimes happen, and it is important that when an error has been identified on an agreement under the CCA that a full analysis is undertaken before any enforcement steps are pursued to ensure that, if necessary, the permission of the court has been properly obtained after consideration of any prejudice which may have been suffered by the borrower. The court is likely to be more sympathetic to a lender who approaches the court at an early stage and properly explains why an agreement may have infringed the CCA and seeks relief, as opposed to the court finding out at a late stage in “recovery proceedings”.

Once the permission of the court has been obtained, the lender is then able to pursue enforcement in the “usual way” by, commonly, service of a “default notice” under s.87(1) of the CCA and, if the default is not remedied by the time specified and prescribed, termination of the agreement and potentially court proceedings.

If you are concerned about an agreement which may have “infringed” an aspect of the CCA and are unsure on whether to / how to properly enforce the agreement whilst complying with your regulatory requirements, then do get in touch through Chambers and I would be happy to assist.

Contact Ben’s clerks

Senior Clerk – Andy Reeves on 0113 213 5252

Talia Webster on 0113 202 8609

Joshua Duree on 0113 213 5246

Mike Alexander on 0113 2135268

Ben Ellison-Tope on 0113 2135207

Disclaimer: Anything posted in this article is for general information only and is not intended to provide legal advice on any general or specific matter.